There are many varieties of chartsâbar, point and figure, candlesticks, swing, mercury, pretzel, and others. I prefer bar charts and swing charts. I began my career with point and figure charts, and insofar as they are now out of fashion, the new trader should give them a hard look-see. Swing charts can be generated using Pugh or Orthogonal swings (on the left) or conventional reversal (diagonal) swings. A unique type is the Goodman swing (furthest to the right on the diagram). It begins with the open, then either high or low (whichever occurs first), low or high (whichever occurs last), and the close.
[caption id="attachment_13293" align="aligncenter" width="355"] Goodman Price-Time Swing Chart[/caption]
There are only four possible typesâbull (higher low/higher high), bear (lower high/lower low), outside (lower low/higher high), and inside (higher low/lower high)âas compared to the previous time unit. The entire complexity of any market canâultimatelyâbe reduced to combinations of these four typesâI find that fascinating. In Figure below, the four types in black are referenced to the thick bar on the left.
[caption id="attachment_13294" align="aligncenter" width="550"] Pugh Bar Charts[/caption]
As a simple example: The famous head and shoulders top formation is typically a bull-bear-bull-bull-bear-bull-bear-bear with a possible inside swing sandwiched in between. Pugh types may be analyzed on swing charts, point and figure charts, or bar charts.
These four primary formations may also be seen on bar charts:
- Tops and bottoms of markets tend to form with high percentages of inside and outside swing types. Uptrendsâbull swings predominate; downtrendsâbear swings predominate.
For explorers, two roads less taken:
- Define Pugh formations in binary notation and analyze the strings. For example: bull = 11, bear = 00, inside = 01, outside = 10.